Amazon’s tablet advantage may lie in the margins

Online retailer can get away with less profitability on hardware

DanGallagher

SAN FRANCISCO (MarketWatch) — Amazon.com’s ability to sell products at razor-thin profit margins may turn out to be key in its expected entry into the competitive tablet market.

Amazon.com has not yet announced its plans for a tablet, but investors are expecting a device to hit the market this fall.

Amazon
AMZN, -0.11%
has never officially confirmed plans for such a device, but its development for a launch this fall is widely speculated among investors. Several analysts have reported checks from the electronics supply chain confirming that the company is building a touch-screen tablet that will run on the Android operating system from Google
GOOG, -1.10%

As such, an Amazon tablet has a tall order ahead given the number of other tablets that have tried and so far failed to carve out a competitive niche against the iPad — the tablet from Apple Inc.
AAPL, -0.87%
that so far dominates the market.

‘Not only does Amazon have the potential to gain share quickly, but its willingness to sell hardware at a loss, as it did with the Kindle, makes Amazon a nasty competitor.’
Sarah Rotman Epps, Forrester

The iconic consumer-electronics maker has sold more than 30 million units of the iPad since it first went on sale in April of last year, building on its already-strong ecosystem of mobile apps and content from its iTunes music and video store.

No other tablet on the market has yet come close; IDC estimates that Apple was responsible for more than 65% of all tablet shipments in the first quarter of this year, with the next-highest-turnover device being the Samsung Galaxy, with about 17% market share for the period.

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The trick for Amazon will be to build on the success of its first consumer-electronics device, the Kindle, which is believed to own a similar, commanding share of the E-Ink–based e-reader market.

“They gained valuable experience with the Kindle; they are not newbies anymore,” said Colin Sebastian of Robert W. Baird in an interview. “The launch of the tablet will be well-thought-out.”

In a report earlier this month, Sebastian estimated that Amazon could sell between 2 million and 3 million units of its tablet in the first year. Forrester Research predicted in a report Monday that sales could hit the 3 million–to–5 million range in the fourth quarter alone, “if it’s launched at the right price with enough supply.”

Companies including Samsung (A005930), Toshiba
TOSYY, +3.36%
(6502), Acer (2353), Motorola Mobility
MMI, +2.83%
and Research In Motion
RIMM
have all remained committed to the tablet market, with more devices expected to roll out from these and other players before the end of the year. Sony Corp.
SNE, -2.64%
(6758) lifted the wraps on its first tablet Wednesday at a trade show in Germany.

But many believe Amazon has the best chance to make a significant dent in the iPad’s market share. The previous entries to date have come in largely on par with the iPad’s $500 entry price; Amazon is believed to be preparing to debut a tablet close to — or even under — the $300 mark.

This would put the company close to a loss for such a device, according to Wayne Lam of iSuppli, a market-research firm that conducts tear-down studies of electronics products. Lam said most tablets with a 10-inch screen similar to the iPad carry an estimated bill of materials in the $300-$320 range. A 7-inch screen takes the bill down to the $270 range, depending on other factors, Lam said.

“If Amazon is going to release a tablet at that price level, it is very likely going to be at or near cost,” Lam said.

Amazon is more likely to get away with such a strategy because its investors are already accustomed to low-single-digit profit margins for its overall business. Apple typically reports a companywide gross margin in the high 30s to low 40s, though analysts believe the company’s margin on the iPad is more in the mid-20s range.

“Not only does Amazon have the potential to gain share quickly, but its willingness to sell hardware at a loss, as it did with the Kindle, makes Amazon a nasty competitor,” Sarah Rotman Epps of Forrester wrote in a report Monday. “Apple sells software and services, but the lion’s share of Apple’s revenue still comes from hardware, which makes it vulnerable to a company, such as Amazon, that isn’t seeking profit from hardware sales.”

Signs are strong that an iPad alternative would do well at lower price points. In an earnings call on Tuesday, bookseller Barnes & Noble
BKS, +0.23%
said its Nook Color device — designed as a low-end tablet with an LCD-based touch screen — was the second most popular tablet next to the iPad, though IDC counts the device in the e-reader category.

Last week, Hewlett-Packard
HPQ, -0.33%
made a high-profile exit when it killed further development of devices using its webOS operating system just six weeks after it launched its TouchPad to disappointing sales. The company announced this week that it would still undertake a production run of an unspecified size after demand boomed for the device at a slashed price point of $100.

Sebastian of Baird doubted that Amazon would sell its tablet at a loss but noted that the company would likely see the device as an opportunity to expand both its digital-media business — involving books, music, movies and video games — as well as a product that could be optimized for the company’s core strength of electronic commerce.

“They have many different levers they can pull to drive a higher installed base for their tablet,” Sebastian said. “Amazon is not just in this for the hardware.”

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